Reinvention of hybrid business enterprises for social good

Business Persons: A Legal Theory of the Firm

By Eric W. Orts

On 1 August 2013, Delaware became the nineteenth state in the United States to adopt a version of a benefit corporation statute, which is designed to expand the range of legitimate purposes undertaken by business firms to include the interests of employees, environmental sustainability, and other nontraditional social goals beyond the traditional objective of profit-making for owners and investors. The event is noteworthy and perhaps a watershed moment in business history because Delaware sets the compass for US corporate law. More than half of publicly traded companies in the United States are incorporated in Delaware, and approximately two-thirds of the Fortune 500 are Delaware corporations. The adoption of the statute was also accompanied by a record number of immediate re-incorporations, including the well-known home goods retailer Method Products (supported by venture capital from European-based Ecover and San Francisco’s Equity Partners). More than a dozen other companies became Delaware benefit corporations as well.

Delaware joins an increasing number of US states which previously adopted versions of benefit corporation statutes, including the commercially important states of California (where clothes retailer Patagonia became the first registrant), Illinois, New York, Pennsylvania, and Virginia. The United Kingdom adopted a similar corporate option in the form of the Community Interest Company, which was first authorized by national statute in 2004. Other countries around the world have also adopted legal variations of “hybrid” business forms that straddle the boundary between “for-profit” and “nonprofit” organizations. Delaware’s embrace, however, signals that this movement may have historical staying power.

As one who teaches in a prominent business school, I perceive a potential generational change in among students who are highly committed to business careers, but who are disillusioned by the narrow financial focus of “maximizing shareholder value” at all costs. These students are motivated by values that extend beyond the scope of augmenting their own personal wealth and advancing their own self-interests. The excesses of Wall Street that caused the worst global financial meltdown since the Great Depression have helped to fuel the disillusionment of this next generation of business leaders. I find heartening examples of Wharton students and those from many other business schools who are pursuing careers in which they are seeking to be a “part of the solution” to global problems, as well as finding opportunities to make a good living for themselves. The legal recognition of new business forms that allow for hybrid combinations of profit-making and social purpose suggest that idealistic pioneers – such as Ben & Jerry’s and Patagonia – may have begun to find traction in terms of changing the “rules of the game” and the basic assumptions of the motivating purposes of business enterprise, at least for a nontrivial part of the global economy.

The path for these new models of business will not be easy. Most probably, it will be difficult for many “hybrid” enterprises to contend with traditional competitors that continue to focus only on one “bottom line” of profitability. Legal recognition of new forms of “hybrid social enterprises,” however, may smooth the road for starting up these new business experiments. One might even imagine a gradual acceleration of business success if consumers begin to climb aboard (as they have done with other firms that have convincingly proclaimed “social good” as a part of their mission) and if new capital accumulation methods (such as the “crowdfunding” that has recently been approved for selective investors in the United States) begin to vie with traditional investment and financial markets.

In a world beset by increasingly worrisome problems of sustainability, economic inequality, and other major social issues, a shift of business models that may allow them to become stronger forces for social good will be most welcome. Delaware’s new statute may spark new research into how best to support and structure these new “hybrid social enterprises” in the future, and signal a new era in which the purpose of business enterprise is reconceived to include a broader and more diverse array of choices and missions than narrow financial theories have considered.

Eric W. Orts is the author of Business Persons: A Legal Theory of the Firm, which presents a foundational legal theory of business firms which is the first to embrace and explain the potential of benefit corporations and other “hybrid social enterprises.” Eric Orts is the Guardsmark Professor of Legal Studies and Business Ethics at the Wharton School of the University of Pennsylvania. He is also a Professor of Management, faculty director of the Initiative for Global Environmental Leadership, and faculty co-director the FINRA Institute at Wharton. He will be a visiting professor at INSEAD in France in the fall of 2013.